Bitcoin Buckles Under China's Assault

Bitcoin values sank precipitously after China's No. 1 exchange stopped taking deposits of the local currency, an action compelled by the government. Though it's another roller coaster plummet, it may not signal the end of the road for Bitcoin. The U.S. government has been much more favorable toward Bitcoin transactions, and financial adrenaline junkies aren't about to give up on its potential.

By Erika Morphy
Dec 18, 2013 5:23 PM PT

China has delivered Bitcoin the second half of a one-two punch that could be the beginning of the end for the virtual currency.

BTC China, China's largest Bitcoin exchange, on Wednesday said it could no longer accept deposits of renminbi -- the local currency -- to purchase bitcoin.

BTC China's announcement was too much for the market, which immediately swooned -- BTC China was quoting Bitcoins at prices 25 percent to 40 percent lower than what they were on Tuesday, the day before it announced it would no longer accept renminbi deposits.

The exchange will continue operating, it said in a post on Weibo, and Bitcoin deposits and withdrawals and renminbi withdrawals will not be affected.

These developments are clearly a setback to Bitcoin's efforts to move into the mainstream. China is one of the largest markets in the world, and its residents' strong demand for the currency had sent its value skyrocketing.

A Fatal Blow

Bitcoin can not recover from this blow, declared Mark Williams, a former Federal Reserve Bank examiner and commodities trader who teaches finance at the
Boston University School of Management.

It's as though the New York Stock Exchange were closed to new customers, he said. Shutting down the flow of renminbi deposits will surely reduce Bitcoin's overall trading liquidity.

"China will be the death knell for Bitcoin as a decentralized universal e-currency," Williams told the E-Commerce Times.

To make an effective comeback, it would have to get off the trading platforms and start "behaving and acting like a currency is supposed to," he said.

That means submitting to regulatory oversight, and most fundamentally, keeping pricing reasonably stable. In the last week, Bitcoin has fallen by $700, Williams noted.

Security Issues

There are other reasons to shun Bitcoin beyond its iffy financial status,
IID President and CTO Rod Rasmussen told the E-Commerce Times. Security is a major concern.

"We have seen problems with Bitcoin for a while, largely around the security of the exchange points," he said. "Hackers and criminals are scrutinizing the systems' weak points, looking to take advantage."

What's China's Problem?

However, it's not likely that China rejected the virtual currency for those reasons, speculated Usha Haley, an international business expert at
West Virginia University and author of Subsidies to Chinese Industry.

"Buyers were probably using Bitcoins as a transactional instrument to circumvent bank fees and capital controls, thereby facilitating unaccounted, hard currency transfers from and to China with minimal scrutiny," she told the E-Commerce Times.

Bitcoin will rise again despite the new restrictions, mainly because its users are "adrenaline junkies," Haley predicted.

"Bitcoin is an inherently volatile, highly speculative, unbacked currency," she said. "A couple of weeks ago, the virtual currency lost half its value in a day -- again prompted by Chinese actions -- but returned to the US$1,000 dollar range."

Most of the people trading in Bitcoins would not be swayed by logical arguments about Bitcoin security or economic value, Haley observed. "The buyers' behavior seems more explainable by emotions such as greed than by rationality, and potential markets for shady currency deals exist worldwide."